CME Market Megamerger May Only Be on ICE

(Bloomberg Gadfly) -- The biggest exchanges -- the very institutions that link buyers and sellers of stocks and derivatives around the world -- have had no luck playing matchmaker among themselves. Cross-border merger attempts by exchange operators from Germany to London most recently, as well as Canada, Singapore, Australia and even New York have all fallen apart at some point in the last six years. 

But there's hope now for a massive transaction in the realm of $50 billion -- this time right on U.S. soil. 

According to a story by Bloomberg's Matthew Leising on Wednesday, Chicago's CME Group Inc. and Atlanta-based Intercontinental Exchange Inc. -- the two dominant U.S. players -- seriously considered a merger a year ago. The talks went far enough to involve bankers and antitrust lawyers, though it's unclear why a deal never materialized. 

In any case, the time may be right for CME, owner of the Chicago Mercantile Exchange, and its fierce rival ICE, the New York Stock Exchange's parent, to come back to the negotiating table. Just as we're seeing in the deal-hungry media and telecom sector, which is already plotting tie-ups amid a purportedly merger-friendly administration, these exchange operators could seize the opportunity as well. 

President Donald Trump's nominee for antitrust cop at the Justice Department, Makan Delrahim, told the New York Times last month that he wouldn't go after a company just because it's "big." While it's hard to glean much from that statement, it is encouraging for would-be dealmakers who witnessed a series of megamergers get quashed by regulators under President Barrack Obama -- including all the failed deals that burned shareholders in the exchange space.

CME and ICE have both been very acquisitive. They bid against one another a decade ago for the Chicago Board of Trade, which ultimately went to CME and created the world's largest futures exchange. The following year, CME also acquired Nymex to add benchmark oil and natural gas futures contracts. ICE, which was founded by Jeffrey Sprecher just 17 years ago, made its big splash when it took control of NYSE Euronext for some $8 billion in 2012, after Germany's Deutsche Boerse AG was blocked from buying the target.

Shareholders would probably be quite receptive to a cash-and-stock deal between CME and ICE. CME shares command slightly higher valuation multiples, making its stock attractive deal currency, and the company has a very clean balance sheet. It would be a boost to earnings even before factoring in synergies, according to data compiled by Bloomberg. With ICE valued at $36 billion and CME at $40 billion, this would be no small undertaking. But CME Chairman and CEO Terry Duffy is looking for something large, if these comments from February are any guide:

"I'm not a big fan of one-off smaller-type acquisitions."

A transaction for ICE would give CME a large presence in European derivatives. But while CME's former CEO Phupinder Gill had embraced the idea of expanding in other countries via deals, Duffy "was more cautious and preferred to stick close to CME's dominance in U.S. futures trading," people familiar with the matter told Bloomberg News. Apparently that difference in vision played into Gill's sudden departure last year. 

I had wondered late last year, as did others, whether CME or ICE would instead launch a bid for CBOE Holdings Inc. and break up CBOE's agreement to acquire Bats Global Markets Inc. However, the $3.2 billion Bats takeover ended up getting done in March (closing the book on a company that long was the butt of industry jokes for botching its own IPO). With CBOE -- a much smaller target -- off the table as it works to integrate Bats, it only makes sense that CME and ICE would look to one another once again. 

So, could we finally see an exchange megamerger from start to finish? It's unclear whether Duffy would look to lead that charge, but it seems that getting ICE's leadership and both sets of shareholders on board might not be too hard.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

1. The confirmation hearing for Delrahim, a member of Trump's transition team, was pushed back due to missing paperwork. He is expected to be confirmed, though Democrats will press him on his past as a lobbyist for corporate giants such as AT&T Inc., whose billion takeover of Time Warner Inc. he may preside over.

2. Originally, ICE and Nasdaq OMX had teamed up for an unsolicited bid to derail the Deutsche Boerse-NYSE Euronext deal, but the Justice Department stood in their way, too. 

To contact the author of this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.